Since the 1950s, oil has been the most important energy source for developed nations throughout the world. Its uses are varied and many, ranging from supplying the energy needed to power industrial processes to providing central heating in homes. Many investors even speculate on oil using CFD trading.
Various geopolitical factors have constricted the availability of this important resource over 2022, driving up prices and triggering a rising cost of living. In this short article, we’ll be taking a look at the causes behind these changes, as well as the effect that they’re having on the UK economy.
What factors are influencing the cost of oil?
There are countless factors that influence the cost of oil. Even at the best of times, prices fluctuate daily. Recent changes, however, have been driven mostly by the following significant causes.
- Global demand: The economies of developing nations such as China and India have been growing rapidly over recent years. Becoming increasingly more industrialised and urbanised, the appetites of these countries are large enough to increase demand throughout the world.
- The COVID pandemic: Oil prices suffered along with the stock market when the pandemic triggered a recession in 2020. Government-mandated lockdowns reduced demand for energy, resulting in falling prices. Demand then increased as governments invested heavily into their economies.
- The Russia-Ukraine war: Russia’s invasion of Ukraine has led to catastrophic production and trade disruptions in both countries, as well as crippling economic sanctions imposed on the aggressor by the United States and its western allies. This tragedy has put pressure on many national economies throughout the world, which rely on oil, coal and wheat imports from Russia and Ukraine.
With these pressures in mind, it’s no surprise that we should see drastic changes in oil prices. As a result, many governments are looking for ways to decrease their reliance on foreign oil imports.
This is also true for the UK. In fact, data released by Statista shows that the oil and gas industry is forecast to invest more than £3.5 billion into the UK continental shelf in 2022, an oil-rich region in the waters surrounding the UK.
What effect is the cost of oil having on the UK economy?
On the microeconomic scale, households are suffering the biggest hits to their incomes in years. Yet to better understand why this is happening, it helps to take a look at the bigger picture.
Higher oil prices are generally linked with inflation and declines in economic growth – exactly what we’re seeing in the UK today. There are a few reasons why this is happening.
Firstly, a higher cost of oil makes all petroleum-based products more expensive. Secondly, it directly increases the costs of necessary industrial processes such as heating or manufacturing and transporting all other goods.
This last effect depresses the supply of other goods in turn. Manufacturers either have to reduce output to manage production costs or raise their own prices – further exacerbating the inflationary effect of more expensive oil.
Times are tough thanks to the recent fluctuations in oil prices. But at least it’s a challenge that we’re all facing together. Tell us, how have the recent oil price changes affected you? Share your thoughts and experiences with us in the comments section.
